Insolvency and Devaluation

Americans are experiencing structural change that impacts our lives in many ways. The consequences for banks and governments will soon be obvious. And, many other forms of inevitable change are becoming apparent.

The injection of newly created money into the financial system since 2008, (and consequent explosion of systemic debt), has resulted in temporary superficial improvement, but generated no productive economic activity.

The response to the financial crisis has been strikingly ineffective. None of the causes of the crisis have been corrected. Nothing has actually changed.

Last week we looked at four reasons why the Federal Reserve is taking extreme measures to fight deflation when falling prices would seem to benefit most Americans.

(See February 6 post, “Why the Bankers are Trapped”)

“Deflation may help consumers and workers,” writes James Rickards, “but it hurts the Treasury and the banks…. The consequence of these deflationary dynamics is that the government must have inflation, and the Fed must cause it. The dynamics amount to a historic collision between the natural forces of deflation and the government’s need for inflation.”

To understand the inevitability of monetary restructuring, or possible collapse, I recommend Rickards’ recent book, “The Death of Money: The Coming Collapse of the International Monetary System.” He is a monetary economist, former banker, and adviser to the Pentagon and CIA.

In clear language, Rickards explains the risk-taking and systemic distortions that have led to our present circumstances. He asserts that the predominant deflationary pressure at present is not an anomaly, but “a valid price signal that the system had too much debt and too much wasted investment prior to the [2008] crash.” And he continues, “…the misallocated capital reached the point where it had to be written off in order to free up bank balance sheets to make new, more productive loans. But, that isn’t what happened.”

The following paragraphs are taken from James Rickards’ concluding comments.

“There appears to be no way out of a sovereign debt crisis for the United States; the paths are all blocked. The Fed avoided a measure of pain in 2009 with its monetary exertions and market manipulations, but the pain was stored up for another day. That day is here.

“Global monetary elites and the Fed, the IMF [International Monetary Fund], and the BIS [Bank for International Settlements] are playing for time. They need time for the United States to achieve long-term fiscal reform [balanced budgets]. They need time to create the global SDR market [the newly reconfigured IMF monetary unit to replace the US dollar as the global reserve currency]. They need time to facilitate China’s acquisition of gold [to reach relative parity with the US, EU, and Russia at 2.7% of GDP].

“The problem is that no time remains. A run on gold [could begin] before China has what it needs. The collapse of confidence in the dollar has begun before the SDR is ready to take its place. The Fed’s insolvency is looming. As the dollar’s 9/11 moment approaches, the system is blinking red.”

Dear friends, we are experiencing the first shocks in a long crisis – an ongoing series of bumps and bruises. The next surprise could take several forms. A banking crisis could leave us without access to cash for a period of time. Devaluation of the dollar could be either sudden or gradual.

It seems quite clear, however, that the dollar will be devalued. James Rickards thinks it could be by as much as 80%. There will be no other way for the government to avoid default – and meet entitlement obligations.

This is not the place to discuss survival issues. Numerous resources are available online and from booksellers. It is clearly essential, however, that we team up with friends and neighbors to plan and prepare.

The safety of our families will depend upon well-organized, trustworthy communities.

Depending where you live, the ground for vegetable gardens should be turned between now and early April. Gardens need to be planned carefully. Please find experienced guidance.

Tom

Next week: A New Kind of Crisis.

Note to readers: You can support this blog and the book project by suggesting that your friends and associates take a look.

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